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$TSLA down 7% today as the market finally comes to grip with the unavoidable reality that Tesla is just another automaker, not a "tech company"
Exhibit A: $TSLA operating margins, which have nearly been cut in half from 17.2% to 9.6% over the last four quarters
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Big tech has a cash flow problem, and it could provide the pin that pops today’s stock market mania.
The MAG-4 hyperscalers including $GOOG, $AMZN, $META and $AMZN are pouring a record $200B annually into data center infrastructure, primarily $NVDA GPUs for the AI Arms race.
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The auto lending boom is going bust
According to Fitch Ratings, the percent of subprime borrowers more than 60 days late on their auto payments recently rose to 5.93%
That's beyond the peak default rate of the GFC, and a giant warning sign for the broader economy
🧵 👇
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Gather 'round, fintwit... it's time to tell the story of the greatest wealth compounder you've never heard of.
This stock has returned 50% annually since its 2016 IPO, and more than doubled the total returns of world-dominating stocks like $AAPL, $GOOG, $MSFT, and $META.
Today,
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Is
#gold
quietly becoming the world reserve currency?
That's the message from foreign central banks, which have replaced half a trillion dollars worth of U.S. Treasuries with gold since 2021
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Interesting... the below the surface revisions are worse than the news making headline numbers. The economy must be in great shape... 🫣🫢
The change has resulted in nonfarm payroll gains being reduced by 386k jobs over the last 12 months…
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The creaking sound you hear? It's the gears of the U.S. economy grinding to a halt.
Like all economic cycles, the turn happens gradually… and then suddenly.
This cycle began with manufacturing, which has been mired in a recession for the last 18 months.
"No worries" said Wall
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This 👇
If the Japanese carry trade was the true driver of the manic melt up in tech stocks (and not “AI”), then watch out below if the worlds largest carry trade blows up.
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Is Charles Schwab $SCHW the next domino to fall in America's banking system?
Little known fact: $SCHW has gradually transformed itself from a discount brokerage to a bank in recent years. And, like many banks, $SCHW loaded up on long duration Treasuries and MBS from 2020 - 2021
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U.S. stocks just posted one of their best H1 performances on record
Many have called this one of the "most hated" rallies ever
While that may have been true earlier this year, all signs indicate the rally has reached a euphoric, blow-off top phase
Consider the following...👇
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The most under-appreciated growth stock in today's market?
Our vote: Philip Morris $PM.
After a decade of stagnant revenue and earnings, $PM is transforming into a growth stock - with revenues consistently increasing at a mid-single digit rate, and earnings growing by
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AI will unleash a productivity boom on the same scale as the internet
And $NVDA will be among the biggest winners
What about $NVDA investors?
History provides some clues...
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Conversely, if the MAG4 companies decide to pull back on capex, this kills the entire AI growth story – and would deliver a death blow to $NVDA’s $3 trillion valuation.
Last week provided like a pivotal moment in this story, when the investment community finally appeared to
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Popular narrative: the mania in mega-cap tech stocks isn't the same as the Dot Com bubble
Uncomfortable truth: it's worse
The chart below from Apollo's Torsten Slok tells the tale - showing valuations of the top 10 stocks leading today's market are more richly priced than the
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$TSLA's ultimate downside risk will come from the market re-pricing shares to trade in line with traditional automakers, at around 6 - 8x earnings.
Even a generous 20x multiple implies a share price in the $70 range, down 75% from current levels.
Buyer beware
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1/ The stage is set for the largest legal wealth transfer in history.
Many fortunes will be lost… and a few will be gained, as trillions of dollars in wealth change hands.
Here's what you need to know to get on the right side👇
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The latest FactSet estimates call for a -6.8% decline in S&P 500 earnings for the upcoming Q2 reporting season
IR teams better bring their best AI talking points, and pray that investors continue buying into the hype over financial reality, because hype is all that's left
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Another day, another earnings bombshell highlighting the growing weakness of the U.S. consumer.
The latest disaster du jour comes from Lamb Weston $LW - one of the largest global potato suppliers to fast food giants like McDonalds $MCD.
$LW is on pace for a 25% decline after
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Our favorite E&S insurer $KNSL delivered another stellar quarter when it reported Q2 earnings yesterday, sending the shares 12% higher today.
We believe this is just the beginning of the potential upside from here. A thread on the key takeaways from its latest report, and why we
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The consensus view on Wall Street says that the strong labor market gives a greenlight to continued economic expansion and higher stock prices.
But major cracks are forming in the labor market that are flashing 🚨🚨🚨 for the stock market and economy
Let’s explore… 👇
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Major risk for $TSLA shareholders going into the Q2 earnings print after the bell...
First, in a highly crowded market dominated by the Magnificent 7 stocks - most of which trade near record valuations - $TSLA is among the most overvalued of the bunch, at 98x this year's
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$TSLA now trades at an eye-watering 77x forward EPS multiple. This valuation might make sense for a capital-efficient tech company with 30 - 40% operating margins.
Not so much for a capital-intensive automaker with no moat, and thus no pricing power.
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1/ The fuse is lit on a $1.3T ticking time bomb...
And yet, the mainstream media remains mysteriously quiet
Hundreds of billions of dollars in securitized loans could go up in smoke
Here's the Trillion Dollar debacle that you won't hear about on CNBC... until it's too late 👇
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Alex Chriss continues delivering the goods at $PYPL and Mr. Market is finally waking up to the opportunity
The latest Q2 results out this morning indicate that the reports of $PYPL’s demise are greatly exaggerated.
Revenue grew at 9%, driven by 8% growth in transaction
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While NVDA’s 38x sales is below the 60x insanity that $CSCO shares reached in 2000, that should provide investors with little solace.
If $NVDA bulls are wrong in pricing in an endless runway of 40-50% growth, investors face the prospect of a lost decade in returns, or worse
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Hotter than expected ADP jobs data just sent 2-year Treasury yields rocketing above the levels that precipitated the Silicon Valley Bank collapse in late March
It's a fine line between "contained" and "contagion"
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Our work suggests the bear market is not over, and that a deep recession awaits both the U.S. and global economy.
Extreme caution is warranted.
If you enjoyed this thread, retweet and shoot us a follow for more content like this!
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Recession-watch indicator of the day: a collapse in US manufacturing.
The latest reading for the ISM manufacturing index fell to 46, the lowest level since 2009. This also marked the 8th consecutive quarter of declines.
Over the last 70 years, this US economy has rarely
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While we’ve focused on $GOOG as one example, the same trend applies to $META $MSFT and $AMZN - all of which have implemented similar accounting changes that have extended their data center depreciation schedules. And all of which have benefitted from a boost in reported EPS that
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"We have never seen a relatively wealthy person complain about their retirement because their portfolio has only averaged a 12% return over 20 years instead of a 14% return.
But we have, unfortunately, seen that most retired people eventually suffer a catastrophic investment
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Here’s the bottom line: we believe the standard valuation metric of price-earnings ratios of the MAG4 hyperscalers are increasingly misleading. These companies appear to be trading at somewhat reasonable valuations relative to reported earnings (mid-20s to mid-30s PE ratios); but
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Big news for $ATVI today...
US court strikes down FTC argument to block the acquisition from $MSFT, and the UK's CMA agrees to a stay of litigation.
$ATVI up 11% on the news
Another big win for Porter & Co subscribers, with +17% returns in a little over 4 months... congrats
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Unlike the leading mega-cap tech monopolies, where robust competitive moats translate into premium pricing power and fat profit margins, $TSLA finds itself in the race to the bottom - slashing prices to compete with a growing array of compelling EV options from other automakers
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"A man will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile."
- Jesse Livermore
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Auto lenders have officially closed the credit window.
Consumers rejections for auto loans are now exceeding applications.
What happens when they shut off the credit cards next?
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$AAPL notched a new all-time high today
A terrific business, but not a terrific price
Trading at over 33x free cash flow, $AAPL hasn't traded this rich in nearly two decades - last reaching these lofty heights in December 2007:
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Shown below: the most complex man-made machine ever created.
It contains 100,000 parts and weighs in at 165 tons (equal to four 747s). The installation alone requires 250 engineers working for 6 months.
These massive machines create the microscopic imprints in the world’s most
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The power of compounding, visualized over a 30-year investment timeline:
Invest $1,000 each month, compounded at 7% per year ➡️ $1.2M
Invest $1,000 each month, compounded at 15% per year ➡️ $6.9M
Invest $5,000 each month, compounded at 7% per year ➡️ $6.1M
Invest $5,000 each
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“I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” - Warren Buffett
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$TSLA is part of the "magnificent 7" tech stocks that have led the market higher in 2023, adding $500 billion in market value since the start of the year
There's just one minor problem...
2023 earnings estimates for $TSLA are moving in the opposite direction - falling nearly
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Even as price cuts have kept $TSLA's revenue line growing at 50% per year, this growth has come at the expense of profitability.
Analyst estimates for 2023 earnings continue to plummet, creating an incredible divergence between $TSLA's share price and its EPS trajectory
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Recession watch
$COST management noted in their latest earnings call that consumers are trading down from beef to chicken, a sign of consumer weakness they typically see during recessions:
"Historically, we've always seen someone -- like within fresh protein, we've always
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Risk happens fast…
Japan's Nikkei stock index plunged 12.4% in overnight trading, the worst drop since 1987’s Black Monday.
The contagion has rippled into U.S. and other global markets, with blue chip stocks like $NVDA and $AAPL down 5-10% across the board.
With the Fed on
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A Huge Recession Red Flag Just Popped Up
Every once in a while, a financial panic or deep recession provides the rare chance to buy quality merchandise at fire-sale prices. The time isn't now, but it's coming.
A thread🧵breaking down why we see that opportunity coming:
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Here’s the problem - a little thing called the AI boom began in 2023. And instead of reaping the benefits of less capex spending due to longer useful lives of data center equipment, $GOOG and its peers have instead added billions to their annual capex budgets in order to upgrade
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This is why the labor market is the most lagging of all economic indicators.
The weakness shows up gradually, through less hours worked, and then all at once via mass layoffs.
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U.S. leading economic indicators just posted their 14th consecutive monthly decline in May.
Historically, when this key indicator has declined for 12 consecutive months, the U.S. economy has never avoided a recession.
To quote the great Stanley Druckenmiller from a recent
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The
#copper
supply crunch has reached a critical level.
The latest data from global copper exchanges shows inventories have dropped by 45,500 tons so far this year to just 31,900 tons - the lowest level since 2008.
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Dominos +11% today on news of Uber delivery partnership.
We recommended $DPZ for P&C subscribers at $300. Currently up 30% and we believe this one’s just getting started!
$DPZ is an incredibly capital efficient business, with a dominant competitive position, and a long runway
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Here's why it matters...
Subprime borrowers often experience trouble before it shows up elsewhere in the economy.
We saw this ahead of the last crisis in the late 2000s, when subprime mortgages started “dropping dead” in 2007, nearly a year before the crisis was headline news
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Congratulations to our fearless leader
@porterstansb
and his beautiful bride!
What a view from Italy!
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File this one in the "things you don't see in a new bull market" folder...
Bankruptcy filings quietly approaching highs last seen in 08/09 and during the initial phase of the COVID-19 shutdowns:
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While today's auto boom pales in comparison to the mortgage debacle of the 2000s, the same credit cycle dynamics are at work
The distress in auto lending is an early-warning signal of what's coming for the broader economy as the cycle turns
More here:
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Here’s where the rubber meets the road…
The accounting changes $GOOG made since 2021 has enabled the company’s reported earnings to massively outpace its free cash flow generation.
From 2021 through the last four quarters, $GOOG EPS has grown from $2.6 to $7.1 or an increase
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In this analysis, we’ll zero in on the $GOOG earnings report from last week, which provided a preview of what’s to come for the rest of the MAG5.
Despite $GOOG reporting double digit earnings growth that beat analyst expectations, the shares sold off by 5%. It also sparked a
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Is the global economy already in a recession?
That's the latest call from Oxford Economics, based on its "nowcast" for global GDP growth falling to 1.2% in Q2.
Historically, anytime global GDP growth has fallen below 2% it's signaled a global recession.
Is this time
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The advantage of writing E&S insurance is that regulators classify these policies as “non-standard” due to the higher risks involved, unlike “standard” P&C contracts that have strict regulator limits on their terms. Thus, E&S insurers have greater freedom to do things like charge
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Philip Morris says, "what bear market?"
When you absolutely, positively need the ultimate recession-proof business model, accept no substitute.
$PM
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Starting in 2021, the MAG4 began making significant changes to their depreciation methodology used for two of their biggest sources of capex spending: servers and networking equipment in their data centers.
In the case of $GOOG, the company made its first accounting change in
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Is the U.S. already in recession?
You wouldn't guess it by looking at the latest jobs data Wall Street is cheering this morning, with the headline number of 206k new jobs reported for June surpassing expectations of 190k.
But under the surface, the picture looks far less
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The total amount of outstanding auto debt has risen to a record $1.56 trillion, up from around $700 billion in 2009
As the credit bubble reached its extreme last summer, more than 95% of borrowers were not subject to income verification
Low interest rates made it all possible
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Today, we are in the preface of the greatest legal transfer of wealth in history
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Higher interest rates normally slow the housing market, and bring shelter costs down.
But this time really is different. Thanks to the prior decade of rock bottom interest rates, current homeowners are keeping the supply of existing homes off the market.
It makes little sense
Ladies and gentlemen, I present to you the portrait of unintended consequences.
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$LULU shares are now in a 50% drawdown and have just fallen below 20x earnings - the first time it's traded at this valuation since the Great Financial Crisis.
We're rolling up our sleeves to determine if this $LULU decline presents a buying opportunity or a value trap.
What
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The US is expected to more than double its liquefied natural gas (LNG) export capacity over the next 5 years
3 LNG projects are expected to reach a final investment decision this year, bringing the country's annual LNG export capacity to 169 million metric tons by 2027
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Don’t look now, but credit card delinquencies are now at the highest levels of the last decade for the younger, lower-income demographic that wasn’t fortunate enough to lock in a 3% mortgage rate in 2020-2021
And this is before student loan payments kick back in this Fall
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As a result, borrowers are falling behind on their payments at a record pace, and it's now boom times for the Repo man.
The total number of repossessed cars was up 11% last year from 2021, and all signs point towards more defaults and vehicle repossessions ahead.
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It's 13-F reporting season, which means we get to see what the world's best investors did with their money in Q2.
Stanley Druckenmiller loaded the boat with stock and call options on Philip Morris $PM. We first recommended $PM to readers of the Big Secret on Wall Street in
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Carl Icahn has generated one of the best long-term investment track records in history, but he has also made a lot of powerful enemies over the years. Now the prominent short-selling firm, Hindenburg, is targeting Icahn and his company.
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Large companies' plans to layoff workers are on the rise... hmmm, that sounds like the economy's in great shape! 😉
U.S. Worker and Retraining Notices indicate the number of big companies planning to lay people off over the next 60 days is rising…
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Despite $KNSL’s massive success to date, this story is still in the early innings, as the company currently holds less than 2% of the U.S. market share for E&S policies.
$KNSL’s founder and CEO aims to replicate the success of companies like Geico and Progressive Insurance -
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Like generals fighting the last war, corporate managers hoarding labor are battling yesterday’s problem: too much demand and not enough workers.
Now, they’re facing the opposite problem: falling demand, with a steady decline in retail sales approaching recessionary levels
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The U.S. housing shortage intensifies.
The inventory of homes for sale on the market fell to 1.32 million in June. That's down 15% year-on-year, and a new all-time low.
Existing homeowners refuse to sell and part with their rock bottom mortgage rates.
This means home
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Last Friday, the WSJ reported that famed activist hedge fund Elliott Investment Management has acquired a "sizeable" stake in $SBUX
We've been patiently waiting for signs of a turnaround in $SBUX operating metrics before recommending the company to subscribers.
One area that
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Who's not buying the $NVDA AI hype?
Insiders, who have dumped over 1 million shares during the meteoric price rise in the last 6 months.
The only net "buys" have come from insiders exercising their stock option grants.
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The latest headline NFP reports, including 339k jobs created in May, has created the appearance of strength in employment.
But the big warning sign under the surface is the dramatic decline in hours worked - now down by the same magnitude as the depths of the 08 Recession:
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Most of $KNSL’s peers started their businesses in the age of paper, and thus they’ve had to cobble together a series of clunky, non-integrated info management systems over time. This has led to a lot of manual processes, and countless hours of wasted time.
Kehoe personally saw
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In other words, $GOOG has no current visibility on a meaningful cash return from its massive AI capex spending… and yet, the company plans to continue spending anyway. Why? Well, because the competition is also spending aggressively, and $GOOG fears being left behind in the AI
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Every credit cycle ends the same way: gradually, then suddenly
The sectors where credit flowed most freely during the preceding boom go down first
And whereas subprime housing was the epicenter of cheap credit in the 2000s; subprime auto loans took center stage this time around
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The AI arms race will fuel a surge in demand for $ASML's EUV lithography machines in the coming years.
And here's the Big Secret about $ASML that makes it our number one pick for playing this coming boom: it's dominant market position makes it virtually impossible for a
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Meanwhile, the lunatics have been let loose in the insane asylum known as the options market, with a return of the pandemic-level call option buying spree last seen during the peak of the 2020 - 2021 bull market:
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The data suggests we’re approaching the end game in this sequence.
The unemployment rate recently jumped from 3.4% to 3.7%, while jobless claims spiked to 18-month highs:
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Money supply contracts and big banks start to collapse... Banks are tightening while excess savings are drying up.
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Eventually, people will stop worrying about the viability of private banks like Credit Suisse, and start worrying about the viability of central banks and the currencies they issue. The coming loss of faith in government-issued currency will cause the ultimate bank run – a run on
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This sequence is part of the standard recession playbook:
Lower profits ---> less demand for labor ---> lower consumer incomes ---> lower profits.
This is a process. Corporations don't immediately start firing workers the minute sales start slowing.
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The business is Kinsale Capital $KNSL - a specialty insurance business that writes “excess & surplus” (E&S) policies.
These are the high-risk policies that standard property & casualty insurers won’t touch. Think of home insurance in hurricane-prone areas, like coastal cities in
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The likelihood of a global financial collapse – akin to the Great Depression of the 1930s – is virtually assured.
Only the timing of the crisis remains in question.
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Another accounting change came in early 2023, when $GOOG once again extended its depreciation schedule for servers and networking equipment in its 2022 10K:
“In January 2023, we completed an assessment of the useful lives of our servers and network equipment and adjusted the
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27/ So to summarize…
Central banks spent a decade filling the powder keg with the dynamite of cheap corporate debt.
Now, they’ve lit the fuse, in the form of spiking interest rates - with the fastest rate hiking cycle of the last 40 years.
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We heard it back in 2008 and it was going to be alright...but what if SBV was just the Bear Stern moment? "Almost half of America’s 4,800 banks have already burned through their capital buffers and are running on negative equity. They may not have to mark all losses to market
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Dream Finders Homes is a real-world case study in the power of capital efficiency, the framework we use for identifying world-class businesses capable of compounding at 15 - 20% per year.
We recommended $DFH on April 28th, at $15 per share. Today, $DFH trades for $30, up 100%
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Banks across the board are about to go into defense mode… Even before the SVB crash, banks had dramatically pulled back on issuing new loans.
The overall credit application rate declined to 40.9% in February 2023, the lowest since October 2020
The application rate for credit
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The warning signs in the labor market should not be ignored.
For a more in-depth look at other key leading and lagging indicators pointing towards more economic weakness ahead, check out the following free article we recently published:
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Lower productivity is pressuring corporate profits. And less hours also means less consumer income, which will add further pressure on profitability.
Total U.S. corporate profits are now in their 3rd consecutive quarter of declines:
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Record short positioning in the bond market could set the stage for a massive squeeze
$TLT its dynamite!
Speculator short positioning in 10-year and Ultra Long-Term (no less than 25 years) Treasury futures remains at record levels...
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The auto lending bubble is popping as more Americans are unable to pay their car loans. The tightening credit conditions that are weighing on subprime auto borrowers signal danger for the far larger corporate and government debt markets.
Just like in the early-2000s housing boom, auto lenders fueled a subprime auto boom over the last decade by aggressively loosening credit standards and throwing standard income-verification safeguards out the window.
Consider the following alarming statistics...
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If you bought a 30 Year T-Bill in 2020, chances are what you bought is worth lass than 60 cents on the dollar today.
The May 2020 30 Year T-Bill (1.25% Coupon) is trading at $.57 on the dollar and the August issue is trading at $.59!
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We see a long runway of profitable growth and market share gains ahead for $KNSL.
Best of all, thanks to a recent short-term hiccup in its quarterly results, shares now trade at a 30% discount to its historic valuation.
We dive deeper into the business model, and where shares
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